China to Unveil Landmark Hollywood Deal

Matthew Garrahan in Los Angeles and Kathrin Hille in Beijing

Wednesday, 15 Feb 2012 | 6:34 PM ETFinancial Times

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DreamWorks Animation and two state-owned Chinese media groups are due to unveil a new joint venture when Xi Jinping, China’s vice-president and heir-apparent, travels to Hollywood to endorse greater co-operation between the U.S. and Chinese media industries on Friday.

Mr Xi, who is due to visit Los Angeles on the final leg of his U.S. visit, is set to announce the tie-up between Shanghai Media Group, China Media Capital and DWA, the studio behind the popular Shrek and Kung Fu Panda films, according to several people familiar with the situation.

His itinerary could yet change, those people cautioned. But his participation in the most significant deal to involve a Hollywood studio in China underscores the mutually beneficial relationship that is evolving between media groups in the two countries.

Under the terms of the joint venture, the companies will construct a studio facility in Shanghai with the aim of developing film, television and live stage productions for the fast-growing Chinese media market. DWA declined to comment; SMG and CMC could not be reached for comment.

DWA was spun out of DreamWorks, the studio started by David Geffen, Steven Spielberg and Jeffrey Katzenberg, in 2004. Mr Katzenberg, one of Barack Obama’s biggest fundraisers, continues to run DWA as chief executive, but the two companies no longer have any formal relationship.

Hollywood studios have been eager to find ways into China’s fast-growing film market at a time when they are facing challenges on the domestic front: the decline of DVD sales, once the film industry’s most important revenue stream, and flat box-office takings.

But the film business is booming in China, where new cinemas are being added at a rate of about three screens a day, faster than in any other country. China is forecast to be the world’s biggest cinema market within the next decade and touched $2 billion in box-office receipts in 2011, a near $400 million increase on 2010.

At a White House press conference on Tuesday, Mr Xi, who is reportedly fond of Hollywood war films, said he looked forward to building a “co-operative partnership” with the US that was based on “mutual respect”. Mr Xi is expected to assume the Chinese presidency in 2013.

As one of America’s biggest export industries, US film and television are extremely popular in China. Yet U.S. movie studios have faced onerous restrictions there over the films they can distribute due to China’s quota system, which puts a strict cap on the number of foreign-made movies that can be screened. Several companies, including Relativity Media and Legendary Entertainment, have set up Chinese operations, often with local partners as stakeholders, to bypass government restrictions on foreign movie productions.

Chinese money is also flowing into Hollywood: Bruno Wu, the Chinese media entrepreneur, and Harvest Fund Management, an investment group backed by Deutsche Bank and China Credit Trust, have set up a new private equity fund aimed at pouring up to $800 million into Hollywood films.

DWA’s deal will see it in partnership with some of China’s most powerful media entities. SMG is China’s second-largest broadcaster and one of the provincial government-owned broadcasters to experiment with reforms. It has restructured itself to develop more content and animation has been one focus.

CMC is a fund backed by SMG, state-owned China Development Bank and China Broadband Capital, an IT fund set up by Edward Tian, former head of a state-owned fixed-line telecoms carrier.

Established in early 2009, CMC is designed as a vehicle to help the Chinese media and entertainment industry internationalize and achieve more commercial success — through buy —outs and other investments both at home and abroad.

The fund, in the form of a private equity venture but with state shareholders, is part of Beijing’s broader attempt to use market forces to develop its media industry while retaining control over content. In 2010, it agreed to acquire a controlling stake in the mainland China channels and the Chinese film library of News Corp.

DreamWorks Animation hopes to use the joint venture to build on the success of Kung Fu Panda in China. The latest film in the series was one of the top grossing movies in the country in 2012, earning more than $100m at the Chinese box office.